58.A: EXPLAIN DELIVERY/SETTLEMENT AND DEFAULT RISK FOR BOTH LONG AND SHORT POSITIONS IN A FORWARD CONTRACT;

Question 1

EXPLAIN DELIVERY/SETTLEMENT AND DEFAULT RISK
FOR BOTH LONG AND SHORT POSITIONS IN A
FORWARD CONTRACT;

Answer 1

The party obligated to make payment and take delivery is the contract
buyer, or long position.
• The party obligated to deliver the underlying is the seller, or the short
position.
• The date of delivery is the expiration, maturity, or settlement date.
• Each party to a forward contract is exposed to default or counterparty risk (Because it’s an agreement to each other, Like when somebody owes you money),
the probability that the other party (counterparty) will not perform as
promised.

Long, buy, hold

Sell, short, issue

Expiration has two arrangements to settle obligations

1. Delivery - Long pays short, short delivers underlying
2. Cash Settlement (or NDF, non-deliverable forwards) - Long and short pay the net cash value of position on delivery date.